Tesla Was the Exception: Electric Car Start-Ups Face Huge Challenges
A new gaggle of EV builders like Lucid Motors, Faraday Future, and Rivian could benefit from a changing industry—or die on the vine.
Over the last five years, new electric-vehicle startups have been debuting like clockwork. Naming all the new companies that have thrown their hats into the ring would take all day, but to scrape the top of the iceberg: Faraday Future made a splash at CES in 2017 with the reveal of its supposedly production-ready electric vehicle, the FF 91. Last year at the same show, China-based Byton showed off its M-Byte SUV Concept, which it claims will go on sale in the U.S. in 2020. Then, at the Los Angeles Auto Show in November, Michigan’s Rivian debuted its electric pickup truck, the R1T. That company also says its vehicle will hit the streets next year, bringing 400-mile range and a meter-high wading depth.
Of course, one has to wonder: Do any of these companies really stand a chance? After all, it’s widely known that launching a new automotive company is one of the most excruciatingly difficult business challenges of the modern era. Look no further than the recent financial struggles of Faraday, which is backed by the deep pockets of China’s Evergrande Group yet still saw layoffs and salary cuts last year. And of course there's Tesla, which has all the innovation and customer support in the universe, yet is still struggling with "production hell" and various economic headwinds.
Furthermore, when you consider that Tesla’s competition at the moment is negligible, with new electric cars barely trickling out from established legacy manufacturers who actually know a thing or two about production, the future of all companies in this space can look dicey. In fact, Goldman Sachs predicted in the fall that those new EVs from the big guys—Mercedes, Audi, Porsche—as well as the anticipated threat from the startups will ding Tesla’s market share and value.
Though that would still all seem to point to a rising tide lifting all boats, it could also mean that the intense competition threatening Tesla might also make it harder for the noobs, including Fisker, W Motors, Lucid Motors, and Workhorse, as well, to succeed. According to analysts, Tesla’s growth will be tough to replicate.
“Historically the auto industry has been a very harsh environment for startups, and getting to scale can be very difficult,” says Tasha Keeney, an automotive analyst at ARK Invest. “But since Tesla was a first mover and essentially built a better, technologically enabled car with superior batteries and battery packs, it was able to scale before the OEMs realized that EVs were a good idea, and is now years ahead of the competition.”
Even still, given the challenges Tesla is facing in the day-to-day world of auto manufacturing, she sees the likelihood of success for similarly ambitious startups hinging not just on the technology and innovation they bring to the table, but also how realistic their claims are. “We follow any new and exciting players, but we are often doubtful of anyone who is touting superior battery technology,” she says. Because Tesla would likely be the first to acquire and move on new battery innovations, it would thus be unlikely that an upstart would be able to leapfrog over the company in that respect. Keeney does note that Tesla will, in fact, account for half of global battery production by the end of this year.
“There are a lot of exciting things happening in the lab today,” she says, “but manufacturability and getting to scale can be very difficult. That’s not to say impossible though.”
Another huge factor in startup success will be whether the upstarts address the practical realities of the automotive industry from the get-go. IHS Markit analyst Devin Lindsay, who covers alternative propulsion for the automotive research firm, says a variety of such factors go into the firm’s determination as to which startups will successfully establish a footprint in the market. His group works closely with researchers studying production capabilities, and he says a company’s plans to ramp up that mechanism and anticipate vehicle sales is typically a big tell of their future success.
“Do they have the capital to start production? Do they build their own factory or buy an existing one? What about a dealer network?” he says. “They might get enthusiasm from fans, but they need financial backing, production capabilities, and a dealer or sales strategy in place if they’re going to have a chance.”
Those are the harder bits of launching an EV maker, of course—but there are advantages to an electric car play, as well. For starters, the vehicles are simpler, even if their core technology—the batteries—can be complex. In particular, they don’t require intricate engine and transmission design and manufacturing, which opens up the industry to the potential for new players to thrive (if they can get the rest of their house in order). There’s also both an industry and consumer urge to move away from oil, which similarly boosts the prospects of companies offering an alternative. In short, Lindsay notes, the overall automotive environment is increasingly friendly to new players who show up with something new and compelling.
In that respect, Tesla captured imaginations with its technology and performance—from advanced driver assistance systems to its withering 0-60 times—as much as it did its efficiency play, catching the legacy carmakers off-guard in the process. Today’s startups, though, will have to find their own niche. That, Lindsay notes, could account for the recent surge in electric pickup truck reveals, such as Rivian, Bollinger, and Atlis Motors, which have benefitted from gradually improving battery density that enables increasingly larger electric vehicles. Targeting pickup trucks plugs a gap in the EV market.
“Just looking at the popularity of pickups in general—it’s a segment that’s not being addressed right now by EV manufacturers or the legacy carmakers, and that gives the startups an advantage,” Lindsay says. “If it’s a body style or segment that’s not competing against anything, that will allow them to capture market share, and getting in now is much better than trying to get in later.”
But just because a new carmaker doesn’t have the experience of the legacy brands when it comes to manufacturing and sales that doesn’t mean it can’t succeed in part through sheer force of will. It’s happening right now with Tesla, in fact—growing pains notwithstanding.
“I would say that to some extent, because Tesla was a startup in the EV space and had the luxury of starting from scratch, this was a key to its success,” Keeney says. “It didn’t have existing ties with the dealer network, which have proven to be very difficult to break, as GM discovered when it launched its subscription program. It had to revise it to include dealer participation. With no dealers, Tesla has better visibility and access to the consumer, and can send OTA software updates directly to cars without dealers acting as middlemen.”
On the other hand, the old-school automakers are learning just as fast. Ford has announced an all-electric F-150 pickup, Jaguar, Audi, and Mercedes are hot on Tesla’s heels with their own electric crossovers, and Porsche and Audi’s sport sedans, coming out next year, will further solidify the competition. Whether or not car shoppers one day mention the likes of Rivian, Byton, or Lucid in the same breath as Audi, Ford, or Jaguar is the automotive question of the next decade.